In a bold decision rendered on March 7, 2013, the Supreme Court of Florida eviscerated the economic loss rule (“ELR”) in contract cases and created a bright-line rule that the ELR only applies to products liability cases. In reversing years of precedent which applied the ELR to a variety of contractual contexts, Justice Jorge LaBarga, writing for the majority, concluded that “[h]aving reviewed the origin and original purpose of the economic loss rule, and what has been described as the unprincipled extension of the rule, we now take this final step and hold that the economic loss rule applies only in the products liability context.” Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., No. SC10-1022 (March 7, 2013) (Not final until time expires to file rehearing motion, and if filed, determined).

In light of the potentially significant economic impact of Tiara Condominium, it will be interesting to see whether the Florida Legislature addresses this issue in future sessions and whether it seeks to promulgate an ELR statute. In the interim, it is incumbent upon all litigants in Florida to examine the extent to which the ELR continues to serve as a defense to an existing claim or lawsuit. The inability to avail oneself to the ELR as a viable defense may significantly impact the exposure and settlement value of the claim or lawsuit. It may also be prudent for a party defending a breach of contract action to revisit an insurance carrier’s previous denial of coverage if that denial was based in whole or in part upon the application of the ELR. Conversely, a party currently prosecuting a case for breach of contract may want to explore the possibility of bolstering the case by amending its pleadings to add a negligence cause of action. One thing is quite clear, Tiara Condominium represents the dawn of a new era in contract law in Florida.

What is the economic loss rule?

In a broad sense, the ELR is a judicially created doctrine followed by the majority of the courts in this country that sets forth the circumstances under which a tort action is barred if the only damages suffered are economic losses. Economic losses have been defined as disappointed economic expectations, which the courts have found to be protected by contract law, rather than tort law. Although the precise origins of the ELR are debatable, the rule first appeared in the context of products liability cases.

The distinction between contract and tort law

With the ELR, the courts in Florida created a line of demarcation between contractual and tort causes of action. Contract law is designed to enforce the expectations of the contracting parties while the objective of tort law is to create a duty of reasonable care between citizens in order to avoid and address physical injuries. Accordingly, one major impact of the ELR was to curtail the remedies available to litigants whose relationship was governed by a contract. Plaintiffs favor tort remedies because they often provide for greater damages than in contract cases and because plaintiffs can avoid certain conditions and limitations set forth in the contract.

The privity of contract economic loss rule

In Florida, the ELR evolved into two categories of cases. The first set of cases is known as the products liability ELR and arises when a defective product causes damage to itself but does not cause any personal injuries or damage to other property. The products liability ELR remains unchanged in the wake of the Tiara Condominium case.

The second set of cases – known as the privity of contract ELR – has been excised from Florida jurisprudence following Tiara Condominium. The privity of contract ELR arises where the parties are in contractual privity and one party seeks to recover damages in tort arising out of the contractual relationship. Under the privity of contract line of cases, Florida courts reasoned that when parties to a contract have negotiated remedies flowing from a breach of the contract, the parties are not permitted to effectively renegotiate and seek a better bargain by pursuing damages available in tort.

Eventually, courts in Florida drew a further distinction between tort claims that arose out of the formation of the contract and tort claims that arose from the performance of the contract. If there was some sort of fraud or misrepresentation that induced a party to enter into the contract, such claims for fraudulent inducement, negligent misrepresentation and similar claims survived the ELR. On the contrary, if the alleged fraud arose out of the performance of the contract, then the claims were barred by the ELR.

The holding of the Tiara Condominium case seemingly eliminates the privity of contract ELR line of cases. Nevertheless, Justice Barbara Pariente’s concurring opinion contains a noteworthy caveat. According to Justice Pariente, the Tiara Condominium holding does not disturb the requirements for maintaining a tort cause of action, including the need to demonstrate that the tort is independent of any breach of contract claim. The issue of whether or not a tort is independent from the breach of contract will continue to be fertile ground for litigation.

The slow, painful erosion of the ELR

Although this “final step” in restricting the ELR to products liability cases may have been sudden, the Florida Supreme Court has increasingly evinced trepidation about the application of the ELR. Through a series of decisions, the Supreme Court whittled away at the impact of the ELR. For instance, by the time the court decided Indemnity Ins. Co. of North America v. American Aviation, Inc., 891 So.2d 532 (Fla. 2004), there were a number of recognized exceptions to the ELR, including professional malpractice, fraudulent inducement, negligent misrepresentation, and independent statutory causes of action.

Practitioners who have been following the ELR line of cases may not be surprised by the outcome in Tiara Condominium. Indeed, this result was foreshadowed nine years ago in the Indemnity Ins. Co. case wherein the court noted that “[s]everal justices on this court have supported expressly limiting the economic loss rule to its principled origins [products liability].” Consequently, the Tiara Condominium decision may be viewed as the inevitable demise for the privity of contract ELR in Florida.

Tiara CondominiumThe potential impact of

With the Tiara Condominium case, the Supreme Court of Florida has blurred the distinction between causes of action sounding in contract and those grounded in tort, which was not overlooked by the dissenting justices. In his concise, yet stern dissent, Chief Justice Ricky Polston clearly objected to the intermingling of contract and tort law and warned that “Florida’s contract law is seriously undermined by this decision.” Equally concerned by the use of tort remedies in purely contractual cases, Justice Charles T. Canady concurred with Chief Justice Polston’s dissent and cautioned that “[w]ith today’s decision, we face the prospect of every breach of contract claim being accompanied by a tort claim.”

Although it is difficult to predict all of its ripple effects and implications, this landmark decision may make it more expensive to defend breach of contract cases, may increase the costs of insurance, and may otherwise make it less attractive to conduct business in the state of Florida. As feared by Chief Justice Polston and Justice Canady, the Tiara Condominium case may open the floodgates to tort claims and tort remedies in traditional breach of contract cases.

For instance, claims arising out of breach of contract often entail issues of law that are disposed of at the summary judgment stage of a case. By opening the door to negligence claims in a contractual setting, the Supreme Court of Florida has introduced the nebulous concepts of “comparative fault” and “reasonableness” to contract law in Florida. Judges are far less inclined to dispose of negligence claims at the summary judgment stage of litigation, and as a corollary, there will be a significant increase in both the costs of litigation and exposure to liability for parties conducting business in Florida.

Prior to Tiara Condominium, Florida law recognized the right of private contracting parties to limit damages in a subsequent suit and such provisions were generally enforceable under Florida law. While contracting parties still have the right to insist upon damage limitation provisions in their contracts, the practical force of such provisions is nonexistent if negligence or other tort causes of action can be used to plead around such contractual provisions.

In that regard, the Florida Supreme Court may have effectively abrogated certain sections of the state’s Uniform Commercial Code. For example, Florida Statute § 672.719 (3) provides that under the Uniform Commercial Code “[c]onsequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.” This section may have been emasculated by the Tiara Condominium decision if contracting parties are permitted to bring negligence or other tort actions in which the requested relief is not limited by the contract.

Further, punitive damages were traditionally unavailable in the breach of contract context. By allowing tort actions arising out of a contractual relationship, the Supreme Court of Florida may have unwittingly exposed contracting parties to punitive damage claims; thus, creating a potentially expensive exposure for parties conducting business in this state.